Next up is Citi with a big report on the debt ceiling and the sovereign rating.

Analyst Brett Rose first walks through what's known about the fiscal fight, and then some of the standard accounting tricks the Treasury could use to avoid hitting the debt ceiling if it's not raised in May (almost nobody thinks it will be).

He then addresses what happens in "The Desperation Stage"

Yet, what if the Treasury still needed more time? The next stage would likely use current assets on the Treasury’s balance sheet to finance the government’s expenses (Figure 10). The Treasury could accelerate its sale of agency MBS or do large-scale repos and raise an additional $130 billion.

The Treasury also has other TARP holdings that it could sell. For example, the Treasury holds approximately $15 billion of GM stock that could be sold. Most of the remainder of TARP holdings would likely need to be liquidated at a significant discount due to the il liquidity of small bank holdings. Finally, the Treasury also has over $400 billion of student loans on its balance sheet that could be sold (again, at a large discount) or put on repo. We expect that these actions, however, would be disruptive to the market.

Finally, if this is still not, the Treasury would have one more option. The final step that the Treasury could take would need legislative assistance as in 1996. Congress could pass legislation that would not count securities issued to pay down Social Security benefits against the debt ceiling for a specified amount of time. Based on CBO projections, the monthly amount that could be deferred is about $60 billion. Figure 11 is a detailed timeline summarizing the order of events previously mentioned. However, there is room for uncertainty around these actions and dates.

Finally, here's what happens if the Treasury just straight up hits the debt ceiling and runs out of all tricks:

Default: Not pay, defer or restructure liabilities. We expect that the Treasury would prioritize the seniority of debt with Treasury securities as the highest. It is not prudent to risk disrupting the credit of the Treasury market.

Illegally Break Through the Debt Ceiling: The Treasury could ignore the debt ceiling and issue more bonds to pay off bills. This would be against the law and, according to the GAO, the Treasury has never issued debt that exceeded the ceiling since at least July of 1954.

Remember, default is a word with a lot of meanings, and it could mean cutting off other obligations -- like payments to the entitlement programs -- rather than actual default, not paying bondholers.

If the latter happened, an illegal breach of the debt ceiling, all hell would probably break loose in DC.